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12C — September 28 - October 11, 2018 — Fall Preview — M id A tlantic
Real Estate Journal
L ending By Kathy Anderson, Progress Capital Advisors Opportunity Zones: What you need to know
B
uried deep within the new ‘2017 Tax Cuts and Jobs Act’ is a tax
• An equity interest in an entity that is a US corpora- tion, partnership or LLC that is a Qualified Opportunity Zone Business. During sub- stantially all of the time that the Qualified Opportunity Fund holds the equity inter- est, the entity must qualify as a Qualified Opportunity Zone Business which cannot include golf courses, country clubs, massage parlors, hot tub facilities, racetracks or other facilities used for gambling, or any stores where the principal business is the sale of alcoholic beverages for off premise con-
sumption; and • Tangible property (real estate) acquired by a Quali- fied Opportunity Fund after December 31, 2017 which is substantially improved. Prop- erty is treated as substantially improved only if the capital expenditures made with re- spect to the property in the 30 months after its acquisi- tion by the Opportunity Fund exceed the purchase price for the property. Property does not qualify as a Qualified Op- portunity Zone Property if it is acquired from a related person (20% or more commonly owned entities). Tax Benefits of Investing in Qualified Opportunity Zones • The first tax benefit is the tax deferral. The capital gain from the sale of a qualified as- set is deferred until December 31, 2026, at which time the tax must be paid. • If the Qualified Opportu- nity Zone Property is held for five years, the taxes due are reduced by 10%. This increases to 15% if the investment is held for seven years. • If the investment is held for 10 years or more, the investor is entitled to a step-up in basis to the investment’s FMV at that time so any appreciation in the value of the investment can be excluded from income. To date, there has been very little guidance from the IRS on exactly how the Oppor- tunity Zone provisions will work. The IRS has announced a self-certification process for establishing Opportunity Zone Funds by simply attaching a self-certification form to the fund’s first-year tax return. The IRS will be providing further guidance covering the rules regarding the treatment of debt and whether invest- ment partnerships can invest their capital in stages to match the development cycle. The next big question is how each State will treat investments in Opportunity Zones for State Tax purposes. The bottom line is that an investment in an Opportunity Zone Property not only pro- vides tax benefits, but if the investment is made prudently with a sound business and or development partner, it can prove to be a diversified wealth building tool. Progress Capital is working with clients who own properties continued on page 22C
exchange rules on steroids, it offers not only a tax deferral on the capital gain, but also a tax reduction and permanent tax exemption on the new in- vestment. What Qualifies as an Opportunity Zone Investment? Each state can designate a quarter of its eligible low- income communities as Op- portunity Zones under the Tax Act. Qualified Opportunity Zones are intended to encour- age investments that will be used to start businesses, develop abandoned properties
or provide low-income housing in distressed communities. Under the program, taxpay- ers are able to invest their capital gains into a third party Qualified Opportunity Fund or a self-directed Fund within 180 days of recognizing the capital gain, thereby deferring the tax on the capital gain to December 31, 2026. The longer the funds stay invested, the larger the tax savings. This tax incentive is intended to help “areas in need of redevel- opment” attract capital. What Qualifies as an Opportunity Zone Property?
incentive for investment in qualified O p p o r t u - nity Zones. This may be the s i ng l e most signifi- cant wealth building op-
Kathy Anderson
portunity for anyone realizing capital gains from the sale of real estate, stocks, bonds or even a business. Perhaps the equivalent of the 1031
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